Goldman Sachs Hints at a U.S. Civil War: An Economic Black Swan or a Real Political Red Line?

Goldman Sachs' latest report hints that geopolitical risks may be overlooked, but Ray Dalio, the head of Bridgewater Associates, pointed out that the probability of a U.S. civil war is as high as 40%. Wall Street investment banks avoid discussing this, but the turmoil behind the market cannot be ignored. Let us analyze the deeper meaning of this event and its possible impact.

What exactly is a “tail risk”?

Goldman Sachs mentioned in its report that although the U.S. election would not have a major impact on the stock market, it did not explicitly consider the tail risks arising from geopolitics. What exactly is this “tail risk”? Ray Dalio of Bridgewater Associates gave a clear answer: a U.S. civil war.

Why is the possibility of a civil war so high?

In May of this year, Dalio warned in an interview with foreign media that American society and politics are deeply polarized, and that the U.S. election could intensify this division, with the probability of a civil war reaching 40%. Dalio's view is supported by substantial data. For example, a poll by The Economist in 2022 showed that 43% of Americans believed that the possibility of a civil war occurring in the next ten years was “somewhat likely” or “very likely.”

What can analysts do?

Although the probability of 40% may seem troubling, analysts can at least find a response strategy in the “40% rule.” According to the theory of Dario Perkins, head of TS Lombard, this scenario can help analysts cover easily overlooked tail risks and provide clients with necessary warnings. Although extreme events may not occur, it is always beneficial to simulate extreme scenarios. Market reactions The market is usually sensitive to extreme risks. However, Goldman Sachs downplayed this risk in its report, undoubtedly to stabilize investor sentiment. Historically, investment banks such as Goldman Sachs have often avoided discussing major issues, such as the U.S. election previously. However, as Dalio said, ignoring the tail risks arising from geopolitics is unwise.

How should investors respond?

For investors, understanding and preparing for these low-probability but high-impact tail risks is crucial. Simulating extreme scenarios and preparing response strategies may provide some stability and direction in uncertain markets. In conclusion, Goldman Sachs' report hinting at the probability of a U.S. civil war 40% reminds us that the investment community must focus not only on direct market indicators but also examine the political and economic risks behind them. Especially amid the current globally turbulent political environment, establishing risk management and response strategies is an issue that every investor must take seriously.

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